Thursday, May 30, 2013

Where Do Mortgage Interest Rates Actually Come From ?

Chicago, IL  Home of the Chicago Board of Trade

I have listened people for years say things like "The stock market is down, so rates must be going up", or "The Fed Reserve is meeting today and the rates may go up, right ?".

All WRONG.  Have you ever noticed that sometimes the Federal Reserve will make an announcement about reducing the prime rate, and mortgage interest rates actually rise after the announcement?  That doesn't quite make sense does it?
Well, it does not make sense because the stock market, the Federal Reserve and mortgage interest rates actually all operate independently of each other, and, although they can affect mortgage interest rates, the do not have a direct affect on rates.  However - the way investors view the markets and the EXPECTATIONS that investors have DO have an effect on mortgage interest rates.

Mortgage Interest rates are traded as Mortgage Backed Securities (MBS) bonds at the CBOT (Chicago Board of Trade) in Chicago.  Mortgages are put together in bundles, called tranches, and then traded as bonds on the bond market.  The MBS bond is a claim on the potential principle and interest cash flows of the bond itself.   The price that these bonds are sold for directly affects the interest rates that banks offer to the public.

Now, that's not to say that they all don't have an effect on one another.  Mortgage rates are affected by the economy as a whole, including the unemployment rate, turmoil in the middle east, projections on the next quarter's gross domestic product, and all kinds of other economic factors.  Some even believe that the 10 year treasury note is directly connected to mortgage interest rates.  And, although they appear to be tied together at the hip, they are independent as well.

A MBS bond is affected by the economy as a whole because a bond is only going to be purchased at a time when the purchaser gets the biggest return on his investment.  And all of the economic indicators such as the stock market, the jobless rate or the prime interest rate can and do affect mortgage rates.

So - the next time you hear something positive, or negative, about a economic indicator, don't get too upset or concerned that it's going to "make rates" go up, or down.  It's probably going to have the opposite effect than you may expect, or not affect mortgage rates at all...

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